City of Industry paid millions to contractors but didn't track how it was spent, audit finds

The City of Industry has about 400 residents and about 2,500 companies. (Luis Sinco / Los Angeles Times)

The City of Industry paid tens of millions of dollars to city contractors without keeping track of how the money was spent and what services were provided, according to a state review released Thursday.

City officials charged expensive meals, wine tastings, massages, an iPad and a 65-inch television to city credit cards, the review found, and it called 83% of all charges over the period reviewed "questionable." One meal, auditors discovered, cost $560.

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Auditors criticized city leaders for failing to provide proper oversight of the city's finances and raised questions about how they spent public money.

Over an eight-year period, the City Council met for an average of 18 minutes per meeting and unanimously approved "without question or scrutiny" all resolutions and ordinances but one, according to the review.

From July 1, 2001, to May 14, 2015, not a single invoice for services was questioned before it was approved and accounting controls were "effectively nonexistent," auditors said.

"This is the most recent in a series of reviews performed by my auditors showing a disturbing pattern of weak fiscal controls in a handful of cities," state Controller Betty Yee said in a statement.

City of Industry officials said the review identified many of the same issues that a new group of city leaders is trying to fix. As part of an ongoing government-reform process, the city has reviewed each of its contracts, hired an independent auditing firm, recalled nearly all fuel and credit cards from city officials and staff and analyzed contractor invoices to make sure the city isn't being improperly charged.

"Our city is under new leadership, and the new City Council has made clear their commitment to adopt best practices, increased transparency and reforms to serve our residents, businesses and the regional environment," City Manager Paul Philips said in an emailed statement.

The state report was spurred by a city-commissioned financial review by auditing firm KPMG last summer that found that companies owned by former City of Industry Mayor David Perez and his family were paid $326 million under city contracts over two decades.

The City of Industry's case is also being reviewed by the Los Angeles County district attorney's office, spokeswoman Jane Robison said.

Auditors found that Perez's company, Zerep Management, had reaped huge profits from the city without providing complete documentation, charging six times as much as a competitor for street-cleaning services, and had collected $28 million for vehicle and equipment rentals over 11 years — enough to buy several fleets of vehicles.

After Perez stepped down in 2012, the city — led by then-City Manager Kevin Radecki — terminated its contract with Zerep (Perez spelled backward) and sued the Perez family last year, alleging that its companies fraudulently billed the City of Industry for millions of dollars.

An election in June saw three Perez-backed candidates regain a majority on the council. One of the new council's first acts was to fire the attorney who spearheaded the lawsuit against the Perez family. Radecki, the brother of current Councilman Mark Radecki, stepped down as city manager after stating concerns that the new council would fire him for challenging the Perez family's contracts. The lawsuit has stalled.

The City of Industry, which has about 400 residents and about 2,500 companies, previously was investigated for voter fraud, but no charges were filed. A Times analysis of voter-registration records found that 85% of registered voters live at properties owned by either the city or the Perezes. The city's cozy relationship with the former mayor and his family's companies was described in a 2009 Times investigation.

The state reviewed the city's finances over a two-year period and found multiple discrepancies.

In one instance, Industry officials transferred $92,766 from a city-funded program to combat plastic theft to the Industry Manufacturers Council, a nonprofit group created by the city's business community to promote trade. The business group, though, was not contracted to provide services for the program, auditors found.

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"Accordingly, the city transferring $92,766 may constitute a gift of public funds," the state review said.

Philips, the city manager, said the business group took an unofficial role in managing the program, in part because the organization's former head, Donald Sachs, used to work for the Los Angeles County Sheriff's Department, which was a partner in the program. But he could not document where the money went.

In another instance, an employee received annual salaries that ranged from $125,281 to $243,600 for performing the same job functions, leading auditors to speculate that the employee had been overpaid or paid twice. City officials could not explain the salary changes.

Auditors also found that the city paid $12.3 million to Zerep even though invoices didn't properly describe the work provided.

The Industry Manufacturers Council also reaped $14.7 million in payments for advertising and promotion, but state reviewers could find no documentation of the work performed, if any.

Philips said the city is reviewing many of its operations. Funding for the business group will be limited to its individual programs. Fuel and credit cards are now kept by the city treasurer, who oversees each purchase, and all meals must be itemized and justified in an expense report, Philips said.